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Photograph by: Nathan Denette
, The Canadian Press files

The proposed foreign takeover of a big Quebec firm, Rona Inc., has the company’s executives recoiling in horror and Quebec Finance Minister Raymond Bachand gearing up for war, vowing to “defend Quebec’s interests.”

Yikes. This must be a disastrous development, right? Perhaps the would-be U.S. buyer, home-improvement retailer Lowe’s Cos., plans to torch Rona’s stores and put all its employees to the sword.

Ridiculous? Well, okay, yes. But not much more ridiculous than the childish tantrums we often see when a faraway company wants to buy a local one.

A foreign takeover is an example of what economists call foreign direct investment.

As the word “investment” suggests, this is far from a bad thing.

There’s no country on Earth that is so well endowed with capital and entrepreneurial genius that it couldn’t do a little better by importing some from abroad.

Foreign investment is a key avenue for the injection of new money, new management ideas and new technologies into Canada’s relatively small economy. It’s especially beneficial in retailing, a fairly unproductive sector.

When Statistics Canada studied foreign takeovers a few years ago, it found that far from hollowing out our economy, they brought better productivity and more research activity. And here’s a shocker: the Canadian head offices of firms with foreign controlling shareholders actually grew employment faster than those of Canadian-owned firms.

That’s not surprising. Firms that operate internationally tend to be big, and they got that way by being innovative and successful.

And by the way, they usually pay more than Canadian-owned concerns, notes policy analyst Finn Poschmann, vice-president for research at the C.D. Howe Institute, one of the country’s leading economics think tanks. He sums up: “You would find very few economists on the planet who think foreign direct investment is a bad thing,”

Poschmann does have some sympathy for those who decry the loss of local control, even if this isn’t based on good economics. After all, when a Montreal company is bought by one headquartered — as Lowe’s is — in North Carolina, some big decisions might no longer be made locally. It’s also true that a new owner could change the lineup of suppliers, possibly to the detriment of Quebec hardware and building-supplies firms.

But these are one-sided arguments. There’s another side, too.

Let’s look at the issue of local control. The fact is the local decisions made by Rona don’t seem to have been very good. Operating in a robust Canadian housing market, it has still seen sales barely budge and earnings per share plunge by 40 per cent over the past two years.

Meanwhile, Lowe’s, which was struggling against a severe downturn in U.S. housing, managed to boost revenues twice as fast as Rona, while earnings per share grew by a healthy 18 per cent in the last two years.

When it comes to suppliers, the truth is that some disruption is entirely possible, but that’s what happens in any change of corporate control.

And the disruption can be positive as well as negative. A supplier can enjoy sales gains by working with a bigger, faster-growing firm like Lowe’s.

And if the disruption caused by takeovers is such a terrible thing, one might ask how the managers of Rona justified their own firm’s growth by acquisition. In the last dozen years, Rona has averaged more than a takeover each year.

It’s notable that in rejecting the Lowe’s offer, the directors of Rona said it wasn’t in the best interest of “stakeholders.” That’s a strange argument. These directors don’t work for “stakeholders.” They work for shareholders, who put their money at risk to help the company grow.

Shareholders were failed by Rona’s directors, as shares slid from more than $25 in 2005 to less than $10 in recent months. Lowe’s is offering them $14.50, improving their situation dramatically. Isn’t that in their best interest?

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